What the Father of the 4% Rule Says about Warren Buffett’s Retirement Advice

What does a retired retirement researcher do with his free time? More retirement research of course!

That’s the case for Bill Bengen, anyway, also known as the father of the 4% rule. Publication of the safe spending rule back in 1994 made Bengen a household name in retirement planning (if such a thing exists). Among his recent endeavors was the analysis of dynamic spending frameworks utilizing Guyton-Klinger Decision Rules, and his latest work examines a retirement strategy attributed to Warren Buffett. Spoiler alert: Bengen considers Buffett’s idea a “roaring success” on a technical basis, though some advisors question whether it would suit their clients.

“Not very surprising that the math works, given Warren Buffett’s reputation as a financial genius,” Bengen told Retirement Upside. 

Buffett on Retirement 

Buffett’s retirement strategy is fairly straightforward (and it doesn’t even include paying for fast food with coupons, as he famously has). He suggests retirees cover essentials with a combination of Social Security and annuities, while discretionary spending comes from an investment portfolio of 65% equities, 20% bonds and 15% cash. The lynchpin of the strategy is to avoid selling stocks during bear markets, instead relying on the cash buffer or on the bond allocation if necessary, while fund income dividends are paid to the cash account. Finally, as with the classic 4% rule, the income rate is adjusted for inflation each year.

Some key findings: 

• The safe portfolio spending rate for the Buffett strategy is about 5.5% to 5.8%, Bengen said.
• That’s lower than comparable inflation-adjustment strategies that allocate less to a cash buffer, but not by much. 
• Dynamic spending frameworks are better at maximizing the safe starting spending rate outright, Bengen said, but Buffett’s approach is viable. 

Realistic? Maybe Not. While they respect the math, some advisors questioned whether the Buffett strategy is realistic. 

“Saying people should just put most of their spending needs into guaranteed income sources assumes people don’t require much return in their portfolio,” said Chad Holmes, founder at Formula Wealth. “Most families need risk in order to achieve returns simply to keep up with compounding inflation over a multidecade retirement.”

Herman Schroeder, founder at Schroeder Capital Management, had a similar take. “Whether that works depends on the person and how large the equity portfolio is relative to what they need to spend,” he said. “Right now, I would rather use short-term bond funds with attractive yields as the near-term spending bucket instead of that much idle cash.”

Another said that 15% cash is way too much, especially if a client’s net worth is higher than $5 million. “You should have about 12 months of cash reserves on hand for retirement,” said Michael Walstedt, founding advisor of Reliant Wealth Advisory. “I would also say people are generally hoping for their Social Security to contribute toward essential expenses, but most people aren’t really as familiar or open to annuities.”